Is It Too Late to Buy NVIDIA Stock?

By Sean O'Reilly Markets Fool.com

Image source: Getty Images.

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It's always rough when a stock you have long followed, which also happens to have a great business model and a management team you admire, experiences a meteoric run-up. It's particularly painful when you've been following said stock for the last 10-15 years. Yes, that's right, in a classic case of an error of omission, I watched with jaw agape as shares of NVIDIA(NASDAQ: NVDA)rocketed up some 30% following its third-quarter earnings release last month. It hurt, and for reasons I shall soon elaborate on, it was a completely unforced error. Fortunately, NVIDIA's future is so bright that it might not be too late to buy a stake in this unique business.

The quarter heard 'round the world

NVIDIA'sshares had already had a great 2016 heading into its Nov. 10 release of third-quarter results, up some 112% year to date. When news hit the wires that quarterly revenues had grown 54% year over year, with the standout division being gaming, which saw revenues soar 63% year over year, along with other smaller divisions (including data center services, which increased to $240 million, up more than 190% compared with Q3 2015), a great year for NVIDIA's share price turned into a gangbusters year. As the time of writing, shares have run up a jaw-dropping 183% in 2016.

No one saw this blowout quarter coming, but for those who believe in the NVIDIA story, it was inevitable.

Why I wasn't surprised

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While I was not the biggest PC gamer in my teenage years, a large number of my peers were. The first question they would ask when discussing the type of power packed into a computer was, "Does it have an NVIDIA chip?" This simple question has been prominent in my mind for the past 15 years whenever the ticker symbol NVDA has come up. This simple phrase was further ingrained in my mind when NVIDIA began to be mentioned in conjunction with virtual reality gaming and, of all things, driverless cars.

The proof of this consistent drive for innovation coupled with profitability is "in the pudding," as the saying goes:

NVDA Return on Equity (TTM) data by YCharts.

With the notable exception of during the Great Recession, which NVIDIA can certainly be forgiven for, its consistent ability to generate exceptional returns on capital over the last 15 years deserves our respect. For a technology company to do this, with the sands of innovationshifting as they do, one has to conclude that the company knows what it's doing.

It might not be too late

Motley Fool Co-FounderDavid Gardner is a big believer in holding onto one's winners. The simple fact of the matter is that strong companies with sustainable advantages and great management have a tendency to continue to do well.

In spite of the fact that NVIDIA shares have seen a huge run-up in recent years, there's a strong reason to believe it's not too late to pick up a stake. Here are the earnings estimates for the next five years:

Metric FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021
EPS Estimate $1.67 A $2.90 E $3.18 E $3.82 E $5.12 E $5.00 E

A = actual. E = estimated. Data source: S&P Global Market Intelligence.

At about $95 per share, and given its spectacular return on equity and earnings growth record, NVIDIA shares do not appear to be outrageously overvalued. It is highly leveraged to not only the driverlesscar market, but the burgeoning industry of virtual reality, which requires high-quality video processors.

Don't let opportunity pass you by

Perhaps the best reason to own NVIDIA, and the chief reason I should be kicking myself, is optionality. A key tenet of Gardner's investment style revolves around a business franchise with myriad ways to grow and change as the business landscape inevitably shifts. NVIDIA started out making video chips beloved by a number of my hardcore video-gaming high school friends. The company has been in the back of my mind as a top-notch innovator for as long as I can remember. It really is the best at what it does, and it has a demonstrated ability to not only push for the best technology, but for fantastic returns on invested capital as well.

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Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.